A&P's Posts Better 4Q Results, Plans 'Major Strategic Restructuring'

MONTVALE, N.J. -- A&P put an end to months of speculation yesterday, by revealing plans for what it called "a major strategic restructuring" of its business, including the possible sale of A&P Canada, and the divestiture of its Farmer Jack and Food Basics operations and support facilities in the Midwest.

The news, couched in A&P's reporting of financial results for the fourth quarter and full year ended Feb. 26, 2005, sent the company's stock soaring. Shares opened Tuesday at $21.50, and shot up to as high as $23.60, to close at $22.55, up $4.28, or 23.4 percent. The stock easily surpassed its 52-week high of $18.90.

In essence, the restructuring scheme would scale the once-virtually national chain back to primarily a regional operator on the East Coast. The chain said it would continue to operate 28 New Orleans-area Sav-A-Center stores, although they would not be part of the company's core business, because the banner is a firm No. 2 in the market.

Said Christian Haub, chairman and c.e.o. of the Great Atlantic & Pacific Tea Co., Inc., in a statement: "The strategic, operational, and financial steps we are taking are aimed at unlocking the value of our Canadian operations and building the value of A&P for the benefit of all of the company's shareholders. They will enable us to deleverage and strengthen our balance sheet, focus greater attention and resources on our core U.S. operations, and pursue the implementation of our fresh and discount retail formats. These initiatives will position the new A&P to achieve sustainable profitability, long-term growth and success, and increased shareholder value.”

Sales for the 12-week fourth quarter of fiscal 2004 were $2.56 billion, compared with $2.72 billion for the 13-week fourth quarter of fiscal 2003. Comparable-store sales were flat vs. one year ago. The fourth-quarter loss was 15 cents per share, as opposed to a loss of $1.56 per share in the year-ago period.

Sales for the 52 weeks came to $10.85 billion, vs. $10.90 billion for the 53-week period in fiscal year 2003. Comps rose 0.1 percent. The net loss per share was $4.88 for 2004, including a loss of 11 cents from discontinued operations. In the year-ago period the loss was $4.08, including earnings of $1.67 per share from discontinued operations, less a 21-cent per share charge related to the cumulative effect of the change in accounting related to franchisees.

"Our significant improvement in the fourth quarter was produced by the sales and profit growth of A&P Canada," said Haub, "driven by our 'Fresh Obsessed' food marketing initiatives and the disciplined execution of our discount Food Basics operations; stronger sales and significant bottom-line improvement in the U.S., set in motion by our reorganization of the U.S. business implemented last November; and our continued emphasis on cost management throughout the organization. All of those factors contributed to our company's best quarterly performance in almost three years, and successfully concluded a year of solid progress toward our goal of sustainable profitability."

A&P's board of directors has given the company's management the green light to adopt the restructuring strategies noted above, as well as the continued rollout of fresh and discount retail formats in its Northeast markets and the search for additional locations for development, the improvement of labor productivity, and significant reductions in operating, supply chain, and administrative costs.

"Our longstanding success in Ontario, combined with current conditions in the Canadian retail marketplace, present us with a unique opportunity to realize the substantial value of A&P Canada at this time," observed Haub. "The proceeds of any such transaction could dramatically improve our balance sheet and liquidity, and provide a solid financial footing from which to achieve and sustain improved profitability and accelerated growth in the United States."

"Although our Midwest U.S. operations are also improving and have significant profit and growth potential, our decision to focus investment and attention elsewhere may result in a lesser allocation of resources than required to realize their full potential; hence the decision to divest our operations in that region," he continued.

Farmer Jack's president, Mike Carter, released a public expression of support for the parent company's plans, which will affect some 9,000 jobs. "We respect A&P's decision and will work closely with corporate management and its financial advisors to create a new ownership structure for Farmer Jack that will ensure our continued presence and vitality as a leading grocery chain serving the southeastern Michigan market," he said.

Apparently attempting to offer assurance to employees, current customers and prospective buyers, he added that his division's stores "are visited by nearly a million Farmer Jack customers every week, have a strong market presence in our region, and are today the only major Detroit-based grocery chain."

During the divestiture and sale process, some 70 Farmer Jack stores in the three-county metro Detroit area that are well-performing -- thanks in part to store remodels and program changes over the past two years -- will remain in operation. As previously reported, other, underperforming Farmer Jacks and 10 additional Food Basics discount stores will be sold or closed over the next few months.

Local observers believe some of the locations will be sold to independents, which have much lower overhead without the high union costs that A&P has had to face.

Although Haub admitted the decisions regarding the Midwest operations and A&P Canada were not easy to make, he said the company believed the changes "will help us achieve our overarching objective: building the long-term value of A&P for our customers, employees, and business partners, and, in turn, for all A&P shareholders."

The planned "new A&P," post-restructuring, would comprise: Two hundred and fifty stores in the New York metro area, with the fresh formats expanding under the A&P, Waldbaum's, and The Food Emporium banners, as well as discount operations growing under the Food Basics name; and 75 stores in the Mid-Atlantic region, with fresh stores developed under the SuperFresh banner and discount operations as Food Basics, in the greater Philadelphia and Baltimore markets.

During a conference call yesterday, Haub said that the company's goal was to have all stores in the Connecticut-Washington, D.C. corridor operating under either a fresh or discount format in three years. He noted later that the fresh format would be "much more dominant." A prime example of the company's fresh format, according to Haub, was a store in Mt. Kisco, N.Y., which had been converted about six months ago and was performing extremely well.

The company said its Northeast operations reported positive comparable-store sales in fiscal 2004 in spite of tough competition, maintaining strong market shares while boosting operating profitability.

Haub said he was confident that the strategies undertaken by A&P would return the company to sustainable profitability "in the latter part of fiscal 2006."

A&P currently operates 650 stores in 10 states, the District of Columbia, and Ontario, Canada under the A&P, Waldbaum's, The Food Emporium, Super Foodmart, Super Fresh, Farmer Jack, Sav-A-Center, Dominion, The Barn Markets, Food Basics, and Ultra Food & Drug banners.
--Bridget Goldschmidt and Meg Major
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